Sunday, March 10, 2019

A Current AIM Small Cap Equity Holding: MGP Ingredients, Inc. (MGP, $81.68): “MGP has Ingredients for Shareholder Value” By: Paul J. Cox, AIM Student at Marquette University

MGP Ingredients, Inc. (NASDAQ: MGPI) $81.68: “MGP has Ingredients for Shareholder Value”

By: Paul J. Cox – AIM student Marquette University

Disclosure: The AIM Equity Fund currently holds this position. This article was written by myself, and it expresses my own opinions. I am not receiving compensation for it and I have no business relationship with any company whose stock is mentioned in this article.


MGP Ingredients, Inc. (NYSE:MGPI) Operates in two main segments, Distillery Products, consisting of food grade alcohol, distillers feed and fuel grade alcohol and Ingredient Solutions consisting of producing and distributing wheat starches and wheat proteins.

• 2018 marked the fourth year of management’s implementation of it’s strategic plan reporting financial results consistent of the plan which included increasing demand for beverage alcohol products and growing the Ingredient Solutions segment.

• For three consecutive years MGPI has added more incremental new customers than the previous year as a result of initiatives to increase sales coverage and refining product offerings to become more popular.

• CFO and VP – Finance Thomas K. Pigott recently increased his position in the company in early January by nearly 5,000 shares.

•MGP’s Balance sheet remained strong in FY 2018 allowing the company to continue to grow as well as return funds to shareholders, including strong access to capital of  $139 million under the company’s credit line as well as $5 million cash on the balance sheet.  Ultimately, this allowed the company to increase the quarterly dividend payments in response to strong financial performance and strong confidence in management’s ability to generate strong free cash flow.

Key points:

Full year net sales grew 7.9% over the past year with strong demand for the premium beverage alcohol growing 5.9% since 2017.  Whisky is the mainstay of the business which saw brown goods increase 11% in net sales, which management attributes to strong demand and solid pricing.
While the brown goods category saw strong growth, the white goods and industrial alcohol market as a whole experienced significant pricing pressure, decreasing margins by 10 basis points in 2018, as indicated by CEO Augustus Griffin in the 2018 Q4 earnings call.

Management has shown a commitment to investing in the inventory of aged whisky to strengthen their market position, invest in building their brand and attract and retain customers. Consumer demand was higher than anticipated in Q4 which drove customers to attempt to fill inventory gaps which boosted Q4 sales.

MGPI has expanded its geographic footprint while simultaneously expanding its brand portfolio, introducing its first proprietary rye, reintroducing its award winning reserve series and launching a new blended bourbon whisky inspired by the American railroad, all receiving high accolades increasing consumer visibility and brand awareness.  During 2018, management has completed brand expansion into Arizona, Illinois, Colorado, and announced expansion into Texas.  MGPI also intends to leverage performance by following consumer trends of high performance and quality ingredients, including plant based proteins, high fiber and protein, non-GMO products.

MGP’s board of directors authorized and announced a $25 million three-year share repurchase program in addition to increasing quarterly dividends per share.

What has the stock done lately?

MGPI shares dropped significantly during December’s market corrections dropping from close to $70/share to around $54/share during mid-December.  Since then, the stock has shot back up to nearly $82/share as of March 4, 2019.  The 52 week range is $53.66 – $100.00. 

Past Year Performance: 

MGPI was added to the AIM small cap portfolio with a price of ~$79 ($78.25 on pitch date) indicating an increase of ~2.53%.  From March 5, 2018 – March 5, 2019, MGPI has increased by 4.48%.

Source: FactSet

My Takeaway

MGPI’s emersion into new geographical markets in Illinois, Arizona, Colorado and Texas could prove to be critical to increasing shareholder’s value.  Management’s share repurchase plan as well as MGP executives repurchasing shares including CEO Augustus Griffin repurchasing nearly 10,000 shares on February 27, 2019 could be a leading indicator management indicates the share price will increase.  Revenue growth will heavily depend on the success of the Whisky segment penetrating new geographical markets and the ability of management to successfully implement investment in the brand to gain new consumers.  If management is able to continue to successfully implement these strategic initiatives, I believe MGPI is positioned to deliver strong growth in 2019 and beyond.

Source: FactSet